Thanks to both Canadian legalization as well as the 2018 farm bill here in the states, North America has essentially become “little Amsterdam.” Moreover, favorably shifting public sentiment in the U.S. has made cannabis-infused beverage companies like New Age Beverages (NASDAQ:NBEV) intriguing for both consumers and investors alike. Particularly, NBEV stock appeals for the underlying broad mixture of cannabis and general health-related drinks.
Still, cannabis stocks are infamous for their volatility. Due to myriad challenges, along with questions about the industry’s financial viability, several investors have dumped out of their positions. Despite New Age Beverages stock not being a pure cannabis play, shares have not received an exemption from the pain. Naturally, investors remain unsure how to approach NBEV.
Further adding to the pressure, New Age will release its third-quarter earnings results on Nov. 14 before the opening bell. Since Q2 2017, the company has failed to deliver positive earnings per share. As such, investors will likely want to see some meaningful pathway toward profitability for NBEV stock.
Given the rough waters of the broader cannabis industry, it’s difficult to guess how the markets will respond on Thursday. Still, legal cannabis products, especially cannabis-infused beverages are incredibly popular. With that, here are three arguments for and against New Age Beverages stock:
Pros: Strong Projected Growth for Cannabis Beverages
Cannabis-based beverages, specifically cannabidiol or CBD-infused drinks, will be huge in the U.S. According to research firm Zenith Global, this market will hit a value of $1.4 billion at the end of 2023. To put this into context, Zenith projects CBD beverages to reach $227 million at the end of this year.
In addition, companies like New Age have the opportunity to convert curious newcomers to cannabis-based products and therapies. According to an August 2019 Gallup poll, 14% of Americans say they use CBD. While impressive, this figure also leaves an ample opportunity for New Age to advantage, potentially lifting NBEV stock.
Not only that, High Yield Insights performed a study revealing that the most popular CBD products are baked goods. Coming in second place are CBD gummies. While not beverages, these are consumable formats with which everyone is familiar.
Therefore, it’s not a stretch to assume that the folks who like CBD edibles will eventually make the switch to CBD-infused beverages. That’s a potential net positive for New Age Beverages stock.
Pros: American Market Wide Open for NBEV Stock
Recently, I interviewed Marty Sumichrast, chairman and co-CEO of cbdMD (NYSEAMERICAN:YCBD). In our long-format discussion, Sumichrast mentioned that the U.S. market is wide open. Furthermore, he argues that Americans prefer CBD to tetrahydrocannabinol (THC)-based botanicals.
Combined with the company’s impressive array of products, this dynamic places cbdMD in a position to become the dominant CBD brand in the U.S.
As a shareholder of YCBD, I wish them well. However, because the U.S. market is so open without an established dominant player, it allows companies like New Age to carve out a niche in a specific sub-segment like CBD-infused beverages.
Pros: New Age Beverage Stock Isn’t a Pure Cannabis Play
Although heavily associated with CBD, NBEV stock isn’t purely a CBD investment. And right now, I’d say that fact offers some key advantages.
Namely, New Age hasn’t followed its cannabis peers in aggressive fiscal maneuvering. Although the company hasn’t been profitable in a while, you can clearly see the pathway to eventual profitability. Primarily, NBEV features strong revenue growth and reasonable expenses.
Also, New Age has a relatively solid balance sheet, highlighted by nearly $84 million in cash and only $13.4 million in long-term debt. Combined with its long-term capital lease obligations, these liabilities amount to $60.5 million.
Simply put, management isn’t making wild swings. At this point, that’s a positive for NBEV stock.
Cons: Legal Uncertainty in U.S. CBD Market
Despite much potential, New Age hasn’t yet entered the CBD-infused beverage space in the U.S. Why? Management has blamed a “murky” legal environment.
I don’t fault them. Under the 2018 farm bill, industrial hemp and hemp-derived products are legal for individuals to purchase. But that doesn’t necessarily mean that CBD is legal. After all, cannabis is still considered a Schedule I drug.
How do American companies get around this tricky situation? CBD derived from hemp is permissible under the farm bill. However, CBD from any other source — even if it contains less than 0.3% THC as mandated by the law — is illegal.
Even when you have everything right, CBD laws are still very confusing and perhaps contradictory. Because of this uncertainty, New Age Beverages stock risks losing momentum to competitors.
Cons: Too Many Assumptions
As enticing as CBD beverages are, nobody really knows how the market will respond. Though enticing for those looking for a non-offensive way to enjoy cannabis, CBD-infused drinks could end up becoming a fad.
More critically, CBD itself could also become a fad. While I don’t think this will be the case, I concede that the medical community is hesitant about endorsing CBD. Further research is necessary for medical professionals to feel comfortable prescribing cannabidiol or other cannabis-based therapies.
Until that happens, NBEV stock has a fundamental risk associated with it.
Cons: Big-Name Competition
As with most good ideas, NBEV isn’t the only one pursing cannabis-infused beverages. Several players are involved in the CBD beverage space, most notably the joint partnership between Molson Coors Brewing (NYSE:TAP) and Hexo (NYSE:HEXO).
Depending on how popular CBD-infused beverages become, other big players might enter the space. This could either be positive for New Age Beverages stock (i.e., a buyout) or it could be negative. Frankly, if larger players enter the space, they could use their leverage to build out a new brand.
Also, the fact that NBEV is stalling in the U.S. market isn’t a great confidence booster.
Final Assessment
New Age Beverages stock is a risk, but a compelling one. With the right amount of luck, shares can take off thanks to its powerful CBD brand. And because the U.S. market is ripe for the taking, the possibilities are endless.
However, NBEV stock falls short because of the legality issue of CBD. And while I’m enthusiastic about CBD-infused beverages, the industry has question marks about viability.
Ultimately, though, a lot of the bad news is baked into the price. If you can stomach the risk, NBEV stock is worth a careful, measured shot.
As of this writing, Josh Enomoto is long YCBD and HEXO.
